In light of the rise in royalty rates for Internet radio stations, Yahoo! and AOL are considering shutting down their online radio services. In fact, both companies stopped directing users to their radio sites after SoundExchange began collecting the higher fees in July. Instead, Yahoo! is promoting its music service that offers videos and songs for sale rather than its Launchcast Internet radio site. As a result, the number of people using Launchcast fell 11 percent to 5.1 million in October, according to ComScore, and AOL Radio users declined 10 percent to 2.7 million.

"We're not going to stay in the business if cost is more than we make long term,'' said Ian Rogers, GM at Yahoo's music unit, according to Bloomberg news.

The two companies were hit with a 38 percent increase in royalties to air music after the Copyright Royalty Board voted that royalties be raised to 0.11 cent for each song listened to from 0.08 cent last year. The rate is scheduled to reach 0.19 cent in 2010.

"The current math doesn't add up," Lisa Namerow, managing director of AOL Radio, told Bloomberg. "If the rates remain as they are, it would be very challenging to sustain a business that is profitable."

Radio sites have been "dealt a severe blow,'' added Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. "It seems very unlikely that at this stage a solution will be reached." He estimated that the higher fees will "kill the growth'' of Launchcast, and that revenue at Yahoo's music unit may rise just 4.7 percent in 2008, compared with a 19 percent increase this year. Launchcast accounts for about a quarter of the division's sales.

Meanwhile, Webcasters and the music industry are still in talks to reach an alternate agreement. Discussions between the Digital Media Association (DiMA) and SoundExchange are ongoing.